Pivoting Toward the Customer: Banking Industry Outlook 2018

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This year may be pivotal for banks as they focus on becoming more strategically focused, technologically modern and operationally agile institutions. To remain dominant, however, they must contend with multiple challenges, including a restive customer base, regulations, legacy systems, disruptive models and technologies, new competitors, cyber risk and changing expectations of talent.

Those are among the findings in Deloitte’s 2018 Banking Industry Outlook, which examines six macro themes underlying the challenges facing the industry’s primary business segments.

Customer Centricity

Many banks—global and local, large and small—have changed their market and customer strategies since the 2008 financial crisis, but their decisions may have been driven by regulatory expectations rather than a refined understanding of markets and customers. And most banking organizations have not gone through the customer-centric transformation that other industries have.

Fortunately, many seem to realize that a fintech ecosystem, once perceived as a threat, can help them serve customers, both through emulation and collaboration.¹ Fintechs, with their laser-sharp customer focus, have shown that it is possible to meet, if not exceed, customer expectations. But technology is typically only part of the solution. To be agile, banks should consider embracing innovation, managing talent differently, and pursuing partnerships within a broader ecosystem to develop and deliver solutions for customers.

Regulatory Recalibration

After a decade of intense scrutiny by regulators globally, banks seem to be sensing some stabilization. In the U.S., new rulemaking appears to have abated. Outside the U.S., national regulators appear to be pursuing paths suited to regional and national priorities. For example, many global firms are dealing with varying local market needs and regulatory mandates, and more recently, with differing views on key prudential regulations, such as the pending aspects of the Basel III regime.²

But expectations of a broad regulatory pullback could be misplaced. Some U.S. regulations are being reviewed and may be amended, such as the Volcker Rule,³ regulations around governance expectations of bank boards, and the size threshold for systemically important institutions. However, higher capital and liquidity requirements, stress testing, and recovery and resolution planning will likely remain intact. Compliance expectations, especially around fair treatment of customers and executive accountability, are expected to stay elevated. Regulators are also expected to maintain vigilant enforcement programs and to demand more data from banks to test the operational integrity of complex institutions—especially when under stress.

To modernize operations, banks could consider integrating regulatory compliance goals—from the standpoint of ownership and accountability—with strategic initiatives such as growth, operational simplification, risk management and cost efficiency. Failure to do so could put banks at risk of missing regulatory expectations and hurting performance.

Technology Management

Technology resources at most banks are becoming difficult to manage, with a hodgepodge of systems, platforms, software and tools—much of it legacy infrastructure that demands significant resources and capital to keep operations running smoothly. As such, modernizing core operating infrastructure appears to be a priority: Gartner’s research shows the global banking industry will spend $581 billion on IT in 2018, up 3.5% year-over-year from $561 billion in 2017.⁴

In the drive to simplify and modernize, and to build technology agility, banks should ask themselves:

—How can they best manage the portfolio of technology assets to deliver the most impact for businesses?

—What is the right level and type of technology externalization (i.e., the use of third parties to design, develop and manage technology solutions)?

—How do they direct development resources toward only the activities that truly create competitive differentiation?

The proliferation of technology vendors and platforms and the maturation of cloud solutions, have made technology externalization more viable—not a new concept for banks, but requiring significant ramp-up in externalization to ensure they remain competitive. Banks’ technology groups can help orchestrate this new model of externalization, as well as modernization of applications. Of course, some activities, such as compliance and risk management, will be maintained internally, with internal technology support.

That said, 2018 may be the year in which banks take a “modest step to a big leap” in terms of how their technology departments redefine their role and value within the organization.

Mitigating Cyber Risk

The potential for cyber risk has been increasing with greater interconnectedness in the banking ecosystem, adoption of new technologies, and reliance on legacy infrastructure. This level of maturity is reflected in the way cyber risk is currently managed at many banks. In particular, funding for cybersecurity continues to increase, and there is greater cooperation among banks, counterparties and regulators, including sharing of information and best practices. Also, many banks have recruited specialized talent into their cybersecurity units.

Yet more can be done to embed cyber risk into the bank’s operations preventively versus reactively. That begins with building a robust culture of due care across the organization, and ensuring that cybersecurity is considered in the design of business processes, strategy and innovation. The benefits of doing so include improving speed to market and helping make firms more resilient and responsive to market needs.

Fintechs and Big Techs

Fintechs continue to lead innovation in the banking industry by sharpening their focus on customer experience. Traditional banks face several choices: replicate what fintechs are doing, respond with equally innovative solutions, become more symbiotic and less competitive, or pursue a mix of these strategies that fit their capabilities and market positions.

Although fintechs have made a mark, they have not disrupted the competitive landscape,⁵ and incumbents will likely maintain market leadership due to three factors that work in their favor: regulatory barriers to entry; natural inertia of customers to switch; and available capital to absorb, partner with or replicate fintechs.

As for technology behemoths’ acquiring banking charters and posing a threat to incumbents, achieving regulatory compliance and inducing customers to switch can be daunting. Instead, these firms will likely be more successful servicing and partnering with banks, especially in data sourcing, data analytics and cognitive technologies.⁶

Reimagining the Workforce

Automation is transforming work, and advances in technologies such as quantum computing will likely accelerate this change. A natural reaction to the automated world could be to speculate about the impact on jobs,⁷ yet alleviating “automation anxiety” in banking is far from new.⁸ For example, ATMs allowed banks to reorient tellers to sales and advisory roles from purely transactional activities.⁹

The future workforce is expected to also be more diverse to include not only permanent employees and contractors, but also freelancers working with multiple banks, fintech hackathoners to generate novel solutions, and even robots that work alongside humans.¹⁰

How prepared are institutions for this transformation? So far, only 17% of global executives across all industries, let alone banking, responding to the Deloitte Human Capital Trends survey say they are ready to manage this diverse workforce of people.

As part of this transformation, banks will likely need to reorient existing workforces to be collaborative and inclusive, while providing more integrated experiences—from recruitment to retirement—to mirror the richer customer experience that the workforce is enabling. This workforce experience would have to be designed to accommodate a work-life balance, a purpose-driven career and, of course, be digitally enabled.

Tackling the Challenges

To understand how these six macro themes may play out, watch what actions the various business lines take to adjust their strategies and thinking to achieve long-term, sustainable growth. While retail and commercial banking should continue to grow at a healthy pace, the challenge might be to adapt to a mobile centric, customer-oriented world in which automation is increasing. Payments and capital markets businesses will likely witness the most change, with the former seeing unprecedented disruption, and the latter undergoing a shift in the basis of competitive differentiation. Wealth management, on the other hand, would need to evolve with the ongoing democratization of financial advice. Deloitte’s 2018 Banking Industry Outlook provides more detail on how these five business lines are approaching the themes outlined above.

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